I’m not sure if my calculations are correct and I haven’t really compared apples to apples but it’s interesting to think about ways to fund investments based on CoC and tax implications.

The 25k contribution into super per annum stumps both these options if your MRT is high as the tax rate is 15% rather than say 40% or 45%. But then it’s stuck in super (not a bad thing necessarily) and you can only put in 25k per annum these days unless you are over a certain age.

This is something I have pondered too. At first I thought land tax was a ripoff, which it is. I suppose any state, organisation or individual has an incentive to game the system to maximise their benefit. As the owners of unreleased vacant land, do states have an incentive to sell at the highest possible price? And don’t they have an incentive to maximise their revenue? In this case one would wonder whether in times of rising land value whther states would get more revenue from releasing less land. Anyway, this leads you down the road of many conspiracy theories.

Demographia have a theory that it is all due to too much planning rules forcing people towards high density.
http://www.demographia.com/dhi.pdf

When you look at the data in Australia though the states with the most land release (QLD, VIC, NSW) have had the most land price appreciation (%) and the states with the least land release (NSW) have had the least land price appreciation in the last decade. So land release and land taxes I think are mainly pro cyclical. For lazy states like NSW who can’t be bothered to govern properly and build infrastructure, they can maximise income in the short term but this has a medium and long term economic impact on the city/state and also land prices. Even in the case of NSW, their income is crunched when land values go down in a downturn and reduced land tax. In a downturn there is a bigger incentive to release land. Still this didn’t seem to happen in NSW in the last minor downturn and their budget still has a problem. So maybe they just can’t release because of their incompetence or other factors.

I don’t think land taxes created the bubble. Something else has changed in the last 20 years to account for land price appreciation in every develloped country well beyond the previous long term average. They could be the increased availability of credit- it is still a lot easier to get a loan now than in 1980. Dual incomes may have also had a significant effect.

That being said, property prices are very specific and subregional, even microregional. The investments are lumpy and you cannot invest in an index so you have to investigate that particular property and that particular micro market quite carefully. I think property investing would be very suited to you if you enjoy analysing individual stocks. There are significant tax benefits such as no land tax up to a certain threshold for individuals and tax deductibility of negative gearing (for now).

http://www.somersoft.com/forums/

Somersoft is a forum for property fans.

Although property is cheap in the US at the moment and likely to appreciate, I haven’t really looked at this option due to the insurance, financing and tax hassles. I find it hard to be comfortable owning something I can’t visit readily in case there is a major issue. The other thing is that foreign individuals and other entities are often treated differently to individuals citizens and tax issues can be higher. This is one of the main reasons direct property investment works out better here than indirect a lot of the time. Trusts and companies as far as I am aware have a lower land tax threshold exemption in most states. You would have to check this yourself, but from what I remember, it is about 500k per individual and you pay 4% land tax per annum on the unimproved value of the land above this, which is a significant cost. The land taxes and thresholds and rules for entities other than individuals vary from state to state but even if they were the same as for an individual, once you have multiple owners and the land value is above the threshold, the land tax becomes a significant cost in a trust or company structure. Of course you get perceived or real legal protection in trusts and company structures and the whole issue of structuring ownership is potentially complex.

Property as a means of building wealth, is excellent due to the leverage (80%). There will come a time in our lives when property is well priced in Australia and this will be an incredible opportunity.

In the meantime, I haven’t invested in any property since 2002, but I haven’t sold anything either. As you mention the transaction costs are high. The return on equity invested has been high due to the leverage -I estimate 200% after costs since 2002 on my investments. This whips the return on equity on the allords for an unlevered portfolio. Which makes you wonder whether shares will have a better decade.

Much of the time, it is actually quite hard to get a better after tax return than paying off your primary place of residence (PPOR). You would need to check with your accountant but one possibility is to pay off your PPOR and to redraw this for investment purposes. Your Cost of Capital (CoC) is then the mortgage rate and your investment is tax deductible without the hassle of margin calls. I don’t know how people can make it work with margin loans as the CoC is significantly higher. The problem with negative gearing for shares is that you need quite a large loan for a reasonable tax deduction. For a 50k deduction you might need a 1m loan. This is nuts on a margin loan in my opinion.